McIntire Investment InstituteAt the University of Virginia

Rocky Mountain

Chocolate Factory

(NASDAQ: RMCF)

M c I n t i r e I n v e s t m e n t I n s t i t u t e1

Prepared by Will Liang and James Rogers| 2 September 2010

(NASDAQ: RMCF)

RMCF is a Premier Confectioner

Founded in 1981

Headquartered in Durango, Colorado

Franchise Business Model

M c I n t i r e I n v e s t m e n t I n s t i t u t e2

• 314 Franchise Locations

• 12 Company Owned Locations

• 32 Co-Branded Locations

Franchise Business Model

Unique In-Store Preparation

Stock Summary

2-Year Stock Chart

M c I n t i r e I n v e s t m e n t I n s t i t u t e3

Basic Stock Information

Share Price: $9.53 52-Week Range: $7.85 - $10.26

Market Capitalization: $57.4M Average Volume (3 Month): 6,945

P/E: 15.75 Total Cash: $4.44M

EPS: $0.61 Total Debt: 0

RMCF is a Compelling Long

1) Has a strong niche position

2) Benefits from positive brand image

M c I n t i r e I n v e s t m e n t I n s t i t u t e

3) Boasts multiple growth opportunities

4) Returns strong cash flow to shareholders

5) Overlooked by most investors

4

RMCF Has a Strong Niche Position

M c I n t i r e I n v e s t m e n t I n s t i t u t e5

Uniqueness Defines and Differentiates RMCF

What

They Sell

The

Customers

Premium Chocolate Quality Minded

Tourists

LoyalStore Made Fudge

Specialty Confections

M c I n t i r e I n v e s t m e n t I n s t i t u t e6

How They

Sell

Stores

Online

Fundraisers

TouristsSpecialty Confections

RMCF Priced in the “Sweet Spot”

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$5.00 $13.00 $16.00 $17.00 $28.00$11.00 $16.00

Recession down-trading as consumers buy cheaper chocolate

(Approximate price per pound)

RMCF Benefits from Positive Brand Image

M c I n t i r e I n v e s t m e n t I n s t i t u t e8

Customers Love RMCF

There's so

much chocolaty

goodness!

Most delicious

truffle of my

life!

Worth the money

we spent!

Seriously, order the

M&M apple; it's the

best one I've tried!

M c I n t i r e I n v e s t m e n t I n s t i t u t e9

I didn't want to

leave!

I literally get

cravings for their

chocolate apples!

This place always

draws me to go in and

buy some almond

turtles and candy!

RMCF Can Expand its Franchise Base

Retail Concentration

Regional Centers 27.0%

Outlet Centers 22.1%

Community Centers 20.2%

Tourist Areas 15.2%

West Coast Concentration

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Tourist Areas 15.2%

Street Fronts 8.4%

Airports 4.2%

Other 2.9%

RMCF can expand its geographic and retail scopes

RMCF Franchisees are Largely Pleased with the Company

Franchisees

agree RMCF

“Seen as perfect medium

between See’s and Godiva.” –

Besma Odeh, La Jolla, CA

“It’s a fun and friendly store

environment.” – Wendy

Smith, Grand Rapids, MI

M c I n t i r e I n v e s t m e n t I n s t i t u t e11

agree RMCF

is a superior

brand

“Customers are drawn to store-

made products” – Raymond

DelFiandra, Rancho Mirage, CA

“We get a lot of positive

feedback.” – Tricia

Jauregui, Woodbridge, VA

If RMCF is so Great, Why are Franchises Closing?

337 344 340356

350

400

RMCF Franchise Store Count is Shrinking

Number of

Domestic

Franchises

In 2010, Entrepreneur magazine ranked RMCF #136

on its Franchise 500 rankings. However, RMCF is losing franchises.

M c I n t i r e I n v e s t m e n t I n s t i t u t e12

0

50

100

150

200

250

300

2007 2008 2009 2010

Total Stores

Franchise Stores -Domestic

Franchise Stores -International

Franchise Stores -Kiosks

Franchises

2007 268

2008 280

2009 270

2010 260

Opening a RMCF Franchise is Costly Compared to Alternatives

M c I n t i r e I n v e s t m e n t I n s t i t u t e13

$100K$0 $200K $300K $400K $500K $600K

Mean RMCF Mean

Franchise Shrinkage is Correlated with the Overall Economy

“Our sales dropped by half when the recession hit. We

held on for as long as possible, then sold the unit for a

quarter of what we bought it for, just to get out. In our

M c I n t i r e I n v e s t m e n t I n s t i t u t e14

quarter of what we bought it for, just to get out. In our

‘region,’ five stores went out of business during this time.”

– Darent, Former RMCF Franchisee in California

RMCF Boasts Multiple Growth Opportunities

M c I n t i r e I n v e s t m e n t I n s t i t u t e15

How RMCF Can Grow Organically

Open New Stores

Increase Same-Store Sales

?

?

M c I n t i r e I n v e s t m e n t I n s t i t u t e16

Increase Same-Store Sales

Increase Online Sales

?

Cold Stone Channel is Best Growth Area

Co-Branding Agreement Co-Branding Growth

High quality,

low cost growth

Cold Stone locations sell specialty

ice cream with Rocky Mountain

toppings and flavors

Management plans to co-brand

“several hundred” stores over the

next few years

M c I n t i r e I n v e s t m e n t I n s t i t u t e17

Growth PotentialCo-Branding Economics

low cost growth

opportunity

“By co-branding these concepts, we hope

to give people more reasons to patronize

our stores year-round.” – RMCF CEO

Given poor

macroeconomy, franchisees are

incentivized to grow sales by co-

branding

14-16% sales growth 1,400 Cold Stones

RMCF Returns Strong Cash Flow to Shareholders

M c I n t i r e I n v e s t m e n t I n s t i t u t e18

Business Model Generates High Free Cash Flow

15%

20%

25%

30%

35%

Return on Invested Capital

2.00%

3.00%

4.00%

5.00%

6.00%

600,000

800,000

1,000,000

1,200,000

1,400,000

1,600,000

Low Capital Expenditures Required

Total Capital Expenditures

Capital

M c I n t i r e I n v e s t m e n t I n s t i t u t e19

“when conditions are favorable the enterprise with the relatively small

capital investment is likely to show a more rapid rate of growth”

– Benjamin Graham, Security Analysis

0%

5%

10%

2006 2007 2008 2009 2010

0.00%

1.00%

2.00%

0

200,000

400,000

2006 2007 2008 2009 2010

Capital Expenditures as a % of Sales

Prior to 2007, RMCF Aggressively Repurchased Stock

4,000,000

5,000,000

6,000,000

7,000,000

Outstanding Common Shares

M c I n t i r e I n v e s t m e n t I n s t i t u t e20

0

1,000,000

2,000,000

3,000,000

2005 2006 2007 2008 2009 2010

Number of Repurchased Shares

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From 2005 to 2010, Dividends Doubled

0.25

0.3

0.35

0.4

0.45

0.5

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0

0.05

0.1

0.15

0.2

2005 2006 2007 2008 2009 2010

M c I n t i r e I n v e s t m e n t I n s t i t u t e23

RMCF returns the majority of

its cash flow to shareholders

Large Cash Position is a Catalyst for Higher Value

9.0%

13.2%

8.0%

10.0%

12.0%

14.0%

Cash as a Percent of Sales

M c I n t i r e I n v e s t m e n t I n s t i t u t e24

2.1%

4.4%

0.0%

2.0%

4.0%

6.0%

2007 2008 2009 2010

What are the Analysts Saying?

M c I n t i r e I n v e s t m e n t I n s t i t u t e25

ABSOLUTELY NOTHING!

Value Added Research Gives us an Edge

See’s Candies is an Appropriate Analogy to RMCF

Unique Opportunity for a Value Seeking Investor

- The moat is See’s Candies’ brand name

- Un-tapped pricing power

“The boxed-chocolates industry in which (See's) operates is unexciting: Per-capita

consumption in the U.S. is extremely low and doesn’t grow” – Warren Buffett

M c I n t i r e I n v e s t m e n t I n s t i t u t e26

- Throws off lots of cash with little need for

additional capital

(in millions) 1972 2007 Change % Change CAGR

Sales 30 383 353 1177% 8%

Profits 5 82 77 1540% 8%

Capital Requirement 8 40 32 400% 5%

Risks Threaten our Investment Theses

Macroeconomic Risks

• Prolonged recession

• Increase in cocoa prices

Business Risks

M c I n t i r e I n v e s t m e n t I n s t i t u t e27

• Growth fails to materialize

• Competition leads to price war

“Small Cap” Risks

• Concentrated Share Ownership

• Low volume and liquidity

Shares Owned % of Total

Hodges Capital Mgmt 751,669 12.45%

Franklin Crail 621,320 10.30%

Fidelity Management 504,405 8.36%

Top Three Holders 1,877,394 31.11%

Recommendation: Initiate 3% Position at Current Prices

High Cash Flow

Compelling Long

M c I n t i r e I n v e s t m e n t I n s t i t u t e28

Surprise Growth

Long Position